Passive investing has been gaining momentum over the past decade. Academic research seems to suggest that most average investors are horribly bad at picking stocks and timing our decisions over the long run. Simply investing in a broad index, perhaps through an exchange-traded fund, seems like the best option for most investors.
The FTSE 100, of course, is the flagship index in this country. It includes the 100 largest companies listed on the London Stock Exchange. Meanwhile, the S&P 500 is the flagship index of the American stock market and is widely considered to be the most critical capital market benchmark in the world.
For a balanced portfolio, I’d like to hold them both. But if I had to pick one, I’d have to take a closer look at the underlying strengths and weaknesses of the two.
When it comes to dividend payouts, British stocks seem to come out on top. The FTSE 100 currently offers a 4.5% dividend yield. Compare that to the mere 1.85% yield of the S&P 500.
I believe this disparity in income boils down to two reasons. Firstly, American technology companies (some of the index’s largest constituents) are overly conservative with their cash and prefer using their stockpile for acquisitions and research. Secondly, British companies are paying out a bigger chunk of their income. The FTSE 100’s dividend coverage ratio is a mere 1.68.
The S&P 500 is much more diversified, both geographically and sector-wise, than the FTSE 100. The FTSE 100’s largest sector is financials, which contributes 20.65% to the total index.
Meanwhile, information technology contributes 19.85% of the S&P 500, but other sectors have much more comparable weights. Communications and consumer discretionary sectors are roughly 10% each, while the financial and healthcare sectors contribute 13% and 15% respectively.
In terms of size, there’s absolutely no competition. The combined market value of the S&P 500 is $24.7trn, while the FTSE 100 is a little over £2trn ($2.45trn).
It’s no secret that America’s larger economy gives it more leverage in negotiations with other countries, a much more stable currency (which is currently the global reserve) and better economies of scale.
Since the global financial crisis ended in 2009, the S&P 500 has nearly quadrupled in value. It’s been in an unprecedented bull run over the past 10 years. Meanwhile, the FTSE 100 has merely doubled over the same period. Even if you account for the higher dividend yield of British stocks, the performance is incomparable.
After a massive surge in value over the past decade, the S&P 500 is looking a bit overvalued. The index’s price-to-earnings ratio is 22.16, whereas the FTSE 100 trades at a relatively modest P/E ratio of 15.4.
The Brexit crisis seems to have suppressed domestic stocks, which makes it more attractive for value investors like me.
I’m a value-oriented, income-seeking investor, which means that despite America’s diverse economy and size, I prefer to bet on British stocks that offer better dividends and lower P/E ratios. The FTSE 100 is my pick.
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VisheshR has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.